0.cached.png
By Newsweek Editors
0
Share
Newsweek is a Trust Project member
See more of our trusted coverage when you search.Prefer Newsweek on Googleto see more of our trusted coverage when you search.
Feng Mingchang seemed a wonderful success story, and he had his government to thank. The party secretary of Nanhai city accompanied Feng, a former fish dealer in southern China, the first time he went to a state-owned bank to apply for a large loan. With the official's help, Feng received the yuan equivalent of a $60 million credit line, the largest any private firm in the province had ever received. Within five years Feng had obtained $890 million from the largest bank in China. He became a star in his hometown, owning what locals said was the biggest manufacturer of decorative wooden boards in Asia, Huaguang Decorative Boards Co. Ltd.
Then the rotten floor fell out. The central government began investigating charges that Feng had colluded with local government officials to fraudulently obtain billions in loans from state banks. Feng's multibillion-yuan business empire imploded virtually overnight. He is now in jail. Several high-ranking local officials and state bankers arrested along with him are awaiting trial. This is China's worst known case of crony capitalism, and it offers some interesting perspectives on the state of corporate leadership.
Perhaps the most hopeful sign is that the story of Feng Mingchang became known at all. It was first exposed in Caijing magazine (which I edit) in 2003, which shows that the government is now allowing media to play their proper role as a watchdog. A milestone was passed in August 2001, when a Caijing cover story revealed how Yinguangxia--a conglomerate that got most of its revenue from vegetable-extract exports and was then the second largest company on China's stock market--had faked $85 million in profits. The authorities suspended trading of the company's stock and launched the first investigation ever triggered by a media expose. The executives were sentenced to jail terms ranging from two to three years. The Yinguangxia scandal was so infamous that when the Enron case broke, the Chinese media called it the "American Yinguangxia."
Read More on News
The full story is not all dirt. Business leadership in China is evolving as fast as the country's rapidly growing economy. China now has about 160,000 state-owned enterprises, which contribute roughly one third of its GDP, and the private sector has accounted for more than half of GDP since the late 1990s. As the private sector has grown, executives of state-owned companies have come under market pressure to act more like private-sector CEOs, with a sharp eye to profits, stock prices and global markets. The government has also established a new agency to represent its interests as the majority owner of state enterprises, improving governance. Even the recent scandals have an upside, putting great pressure on company CEOs to work harder to protect their reputations.
But the state, more than the market, still plays the leading role. In hundreds of the largest state enterprises and most big banks, the Communist Party appoints the top executives down to the deputy directors. The role of the "government" is merged with that of the party, and the boards of directors have little power. Internal controls and accountability are lacking. Compensation is far below international standards. Such conditions are ripe for influence peddling. Consider the recent case of the Bank of China (Hong Kong): four of its top executives, including former CEO Liu Jinbao, are now being held on sweeping bribery and embezzlement charges. Only one "clean guy" remains, a banker from Hong Kong who was paid an international salary. In the private sector the government still controls the most precious resources, including land, and wields a heavy regulatory hand. Business leaders have to invest in relationships with the authorities. Feng Mingchang's story is an extreme case, but it won't be the last to cross the line into crony capitalism.
Ultimately, it is up to the government to prevent corruption in the economy. State entities at every level should reduce their influence over the market--a tough goal to achieve in China. The traditional culture of entrepreneurship will strengthen efforts to create the rule of law, even as the new culture of crony capitalism threatens to twist the relationship between government and business. China has made significant strides since the 1990s in moving toward a more open market, but it now stands at a crossroads. It is not yet clear whether it will go toward a healthy, efficient market economy or fall into crony capitalism, manipulated by the many interests at play.
View 0 Comments
Submit Correction
View Editorial & AI Guidelines